Overall, S&P 500 stocks have been on a stellar run throughout 2024. The US’s flagship index is up 27% since the start of January, or 29% including dividends. Yet some of its constituents have fared far better, including Intuitive Surgical (NASDAQ:ISRG).
The robotic-assisted surgery specialist has climbed by over 60% this year. Sceptics have been arguing that the firm’s big performance is only being driven by a backlog of delayed procedures created by the pandemic.
However, with each passing quarter, the company seems to be disproving this claim. In fact, it’s now beaten earnings expectations seven times in a row. That’s almost two years of consistent outperformance, resulting in a doubling of its share price. And yet, this might only be the tip of the iceberg.
The global leader in surgical robotics
Adoption of robot-assisted surgery has been relatively slow over the last 20 years. The technology’s expensive and most health insurance providers prefer covering the cheaper, traditional surgical procedures. However, this is a story that’s been slowly changing.
The cost’s still high. But it’s been falling steadily. And as an early mover within this burgeoning market, Intuitive Surgical’s now the global leader, with an estimated 50-80% market share worldwide. Its Da Vinci Surgical System seems to have become an industry standard, with hospitals and clinics adding it to their portfolio of medical equipment and investing time in training surgeons to use it.
Da Vinci’s currently the core of Intutitive’s business model, with a continued 18% jump in procedures in its latest results. However, its new Ion System – a robotic minimally-invasive bronchoscopy solution – is seeing significantly faster procedure growth of 73%.
Given Intuitive operates with a razor-and-blade business model, more procedures mean more demand for its high-margin instruments, accessories, and consumables. And it’s a trend that doesn’t appear to be slowing anytime soon.
What could go wrong?
As impressive as Intuitive’s business appears, there are always risks for investors to consider. From a valuation perspective, this S&P 500 stock’s far from cheap. Limited competition grants management monopoly-like powers, resulting in staggering free cash flow generation as the robotic surgery market evolves. Even more so, given the risk of disruption from a new start-up, it seems unlikely due to the regulatory barriers to entry of the healthcare industry.
Needless to say, this advantage is pretty substantial, and it’s reflected in a premium valuation. But it also opens the door to volatility should performance fail to keep up with rising expectations.
It’s also important not to completely ignore established rivals. A tactic that’s being increasingly deployed by peers is creating systems for surgeries that Da Vinci and Ion simply can’t do yet. And once a surgeon’s been trained on these systems, convincing hospitals and doctors to invest time to retrain is a hard sell.
As such, a potential slowdown of R&D innovation is one of the biggest risks for this business, in my opinion. Having said that, the firm’s track record of defying expectations speaks for itself. And with the adoption of these technologies expected to continue rising for decades to come, this S&P 500 gem seems like a no-brainer for my portfolio even at a premium valuation.
I bought some of its shares recently and expect to buy more next month.
